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Austerity in government: a routine exercise?

In the wake of the latest concern of the Reserve Bank of India Governor on the fiscal situation and the escalating inflation, the Prime Minister has asked his colleagues for austerity cuts in expenditure.

This is a welcome development. Fiscal correctives to inflation have so far been confined to taxation.

Now it is recognised that cutting down unnecessary expenditure is also a necessary anti-inflationary fiscal measure.

As reported in the media, ministers have been requested to cut foreign trips while ministries have been told to enforce a ten per cent cut in non-Plan expenditure other than travelling allowance, overtime and the like.

The attempt to curb unnecessary foreign travel is welcome. All the more so when the budget provision for tour expenses of ministers was doubled from Rs. 75.50 crore in Budget Estimate 2007-08 to Rs. 150.43 crore in the Revised Estimate and Rs. 160.76 crore in BE 2008-09.

However, mere cut in tour travelling allowance and overtime and a general target of ten per cent reduction in non-Plan outlay without any reference to specific activities and schemes to be cut does not address the basic problem of pruning a massive non-Plan budget of Rs. 5 lakh crore.

Some major items of budget expenditure in need of urgent action for reduction but not specifically dealt with in the latest austerity drive deserve highlighting.

Subsidies claim Rs. 72,388 crore, made up of major subsidies (Rs. 66,537 crore), interest subsidies (Rs. 2,829 crore), postal deficit (Rs 958 crore) and other subsidies (Rs 2,064 crore).

In addition, there are hidden subsidies as in user charges or fees for services provided by the government like issue of passports where the full and updated cost is not recovered.

The burden of public sector undertakings on the budget totals Rs. 20,123 crore, consisting of Rs. 684 crore as non-Plan grants and loans and Rs. 19,439 crore as budgetary support to PSUs.

There is then the unpaid interest on loans amounting to Rs. 37,198 crore. In addition, the PSUs will be raising Rs. 41,181 crore through market borrowing. Along with government deficits and borrowings these add to the money supply and need critical scrutiny.

Tax exemptions are revenue forgone and to that extent can be treated as an item of government expenditure. This cast a huge budgetary burden of

Rs. 2,78,644 crore in 2007-08 (No figures are given in the current budget).

Any plan to reduce expenditure will be incomplete if this issue is not addressed.

Inadequate preparation and poor implementation of projects and schemes is a nagging problem.

This leads to time and cost overruns casting a burden on the budget.

According to the September 30, 2007status report of the Ministry of Programme Implementation, out of 897 projects 276 suffered cost overruns with an anticipated cost of Rs, 1,42,227 crore against the original estimate of Rs. 95,913 crore, a 48 per cent increase.

Time overruns occurred in 308 projects (exceeding ten years in some cases).

There is no quick fix solution to this problem through exhortation to ministries.

Proliferation of activities and schemes poses problems of prioritisation.

As conceded by the Finance Minister in his reply to the budget debate on July 4, 2008, “The number, the variety and even the acronyms under which these schemes are known are mind boggling.”

In next year’s budget, he announced, “We shall also ensure that programmes and schemes are not allowed to continue indefinitely from one Plan period to the next without an independent and in depth evaluation.”

In fact, such de novo review of all existing activities, schemes and projects is required every year as an exercise in zero base budgeting when ministries formulate their annual budgets so that non-priority and non-productive expenditure can be eliminated.

In the context of the current austerity, it will be pertinent to know the specific results of such reviews and the actual budgetary savings effected.

It has to be made clear as to what the government should do and pay for, what it should pay for but not do and what it should neither do nor pay for.

Issuing austerity circulars will not by themselves lead to meaningful expenditure review, targeting specific non-priority, unproductive and inefficient items. This exercise cannot be left to the ministries.

The Finance Ministry by itself may also not be able to carry out such a systematic review.

The Prime Minister’s Office will have to be closely associated with this work through a special cell.

Periodic progress reports may help the public follow the outcome of this effort which is crucial in the current context of inflationary pressures.

In many cases, reports of commissions and task forces have already identified the problems and solutions. These include the Expenditure Commission report and the Report of NIPFP on subsidies.

What is needed is concrete action under a time-bound programme.

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